Plus, A-B's Next Big Move

FILED APRIL 27, 2012

Dear Client:

Beer volumes just keep getting better. The four weeks ending April 15 show the beer business is up double digits in dollar sales for the first time in a long time: Up 10.6% in Symphony IRI all-channel scans. Volumes are up 6.8%. For the year, that puts volumes up 4.1%. Yes, part of that is Easter timing, but still.

Check out these numbers for the year-to-date: Crown is up 13.3%, Heineken USA up 11%, Pabst up 11.7%, Boston Beer up 12.5%, Yuengling up 56%, Mark Anthony up 18%. Of the top 15 suppliers, 9 are up double digits. That's huge. A-B is up 2.7% and MillerCoors is up 1.4%.

PLATINUM UPDATE. Bud Light Platinum continues to rock, achieving a 1.4 share in the latest four week data, putting it just under its ABV doppelganger Bud Ice in size (more on that below). So BLP has achieved a higher share in four week data than in 13 week data, suggesting that it continues to gain share. In fact, this past week BBD was able to interact with several 20 somethings, and many seem to be just now learning that BLP has higher alcohol content. Obviously A-B cannot advertise based on that fact, so that product attribute seems to be slow to leak into consumer-ville. But as it does it piques interest and trial. As a result, gauging true repeat buys is difficult because there's still a lot of latent trial going on.


"Look, they would have to write very big check indeed, something north of $100 billion and that's a lot of money in anybody's language", yes, even Portuguese. That's the cold water SABMiller chief Graham Mackay poured on a possible acquisition of SABMiller by AB InBev recently at a distributor meeting. More cold water was poured on that possibility by Banco Santander executive director Tony Bucalo, formerly of Credit Suisse. Tony contends in an April 17 note that the time for an ABI / SABMiller deal has most likely passed. Why? Let us count the ways: 1. SABMiller's purchase of Foster's and Efes has made the deal less bankable. 2. SABMiller is already lean and there are few overlapping synergies in such a deal. 3. SABMiller's continued building of breweries apace in emerging markets seems to indicate that their management is in it for the long haul. 4. Major SABMiller shareholders would likely want stock for tax reasons, and the AmBev / ABI controlling families are loathe to give up control. 5. SABMiller is major Coke bottler and ABI is a major Pepsi bottler. 6. With US volumes improving, ABI may be looking back to the US pool of profits for growth.

It is this last reason that is most interest to us. If there is one thing that ABI has learned over the last three years, it's how much money can be made in the United States. I think it's even surprised them, as their synergy targets here have been consistently surpassed and ahead of schedule. And if SABMiller is indeed taken off the table, and Modelo continues to insist that it wants to remain independent, where else is ABI to turn to grow margins and profits?

Tony makes a compelling argument that ABI could look in two places in the US: their distribution network, and buy purchasing PepsiCo's Americas soft drink business.

First, let's cover the distribution business. Here's the money shot from Tony:

"ABI is just beginning to scratch the surface on maximizing the value of US distribution. ABI has yet to leverage fully its ability to increase profitability of an established distribution network such as A-B's in the US. Now that the distraction of restructuring Anheuser-Busch is completed, ABI is now looking for - and is likely to find in our opinion - new profit opportunities in its wholesale network through consolidation around company-chosen 'anchor' distributors or the outright purchase of branches where this is legally allowed. We estimate that ABI could hypothetically control nearly 50% of its distribution compared to 8% today and we believe it will continue to move in that direction."

Let's grok that for a minute. The Anchor Wholesaler concept has been a little fuzzy, probably intentionally so. We know that Anchor Wholesalers are "aligned." We know alignment includes not selling in other A-B wholesalers' markets and not selling a lot of non-AB brands. In our view, we think the Anchor Wholesaler concept also includes ones that will be willing to accept new terms. Diageo was especially successful in doing this during their wine and spirits wholesaler consolidation push about ten years ago, essentially saying: You can continue to be our consolidating wholesaler, but you must accept a different margin structure, spend more in markets, remain exclusive or have separate sales forces, or allow direct sales to chains. And while Diageo didn't have to contend with franchise laws in most states, there are ma ny levers a beer company can pull that a large wine and spirits company would have trouble doing: structure of freight pricing, reach-back with chain pricing, etc.

Tony also makes the case that ABI may look to purchase the Americas beverage unit of PepsiCo - PepsiCo's Americas Beverage or PAB -- so Pepsi's shareholders can focus on the higher margin and faster growing Frito-Lay unit. "ABI is already a skilled Pepsi bottler and by acquiring PAB, we think ABI would work to exploit the opportunities that come with additional scale in the US, with back office consolidation and possible distribution synergies," writes Tony. "[...] We think acquiring PAB allows the company to serve each day part at retail (morning, afternoon and night) where the company now only generally serves the evening occasion with beer."

Let's grok that for a minute as well. To be honest, a purchase of the U.S. Pepsi soft drink business is much more of a game-changer for the beer industry here than a purchase of SABMiller by ABI, since the latter wouldn't affect the US business much due to antitrust concerns. But Pepsi.....that's a different ballgame. At a minimum, ABI could consolidate warehousing, back-office, operations, and even tel-sell. However, in its branch markets, ABI could conceivably consolidate some of Pepsi's delivery with beer, although only in certain types of accounts. Indeed, ABI zone president Luiz Edmond has said that in a mature market like the US, it's difficult to consolidate soft drink and beer delivery. "I don't think it needs to work," he said. "In Brazil you have a very fragmented market with very small drop sizes. The benefit for having two in the same house and the same truck is because you have seven or eight cases as an average drop size.... Soft drinks don't have the scale there. Here in the US they have the scale" to warrant dedicated delivery.

Regardless, having the US Pepsi business would certainly be another reason for ABI to own branches, as at least warehouse and other functions could be consolidated. (Sidebar: How much in cost savings and topline could ABI pull out of a PepsiCo Americas deal? Yes, about $2 billion, the magic number).

Fodder for thought.


STORY UPDATED WITH NEW INFO. New York's alcoholic beverage control law states that a brewer is legally bound to one distributor within a marketing region once they have signed an agreement. Many of New York's small brewers charge distributors, who are protected by the statute, with failing to support or sell their products. "It's very unfair for a wholesaler to sit on a brand," said Brooklyn Brewery founder Steve Hindy to Crain's New York. "It completely stifles your growth."

Last week state lawmakers approved a bill allowing a small brewer (less than 300,000 barrels a year) to cut ties with its wholesaler without "having a good cause." The bill stipulates that the brewer's brands must make up less than 3% of the wholesaler's business for them to part ways. Before the effective date of termination the brewer must also pay the distributor the fair market value of the distribution rights, or refer to an arbitration panel if there's a dispute.

Opinions run the gamut. Saratoga Eagle has no problem with the bill, according to Times Union. Though David Smith, Tri-Valley Beverage general manager, believes the bill is unfair. "We feel that with the work and the investment behind it, it's not right," he said. "Where else in the world can you rip up a contract? We're hoping our relationships with these people, and the job we've done with them, bringing them to the forefront, will have some sway." The New York Beer Wholesalers Association has not taken a stance on the bill.


AJAX TURNER REBUILDS AFTER DISASTER. In 2010 A-B distributor Ajax Turner Co. lost its warehouses, distribution facilities and corporate offices in a flood. On Sunday, the distributor will open the doors to its new 200,000 square-feet of warehouse, keg cooler, distribution and office space. The new facility has expanded their capacity to one million cases and 10,000 kegs.

A-B IS FIGHTING HARD AND SPENDING hard against a bill in Missouri proposed by wholesalers that would make branch ownership illegal, we hear. Bill is likely DOA but distributors still pushing.

WE'VE GOTTEN CALLS from several Midwestern MillerCoors wholesalers this week who are none-to-pleased about a planned April 30 price increase. Why? Don't we love price increases? Well, MillerCoors is asking their distributors to eat the increase because, apparently, they don't feel as if the wholesalers are reaching their targeted PTRs. These wholesalers are hollering "reachback!" and most are planning to pass the increase on to retailers despite having momentum.

IN CASE YOU MISSED IT, we covered the basics yesterday, but there was a full four minute segment in CBS This Morning aired which explored how the big brewers are changing their strategy with light beers. It's worth a watch:;flexGridModule

Until tomorrow, Harry

"It ain't what they call you, it's what you answer to." - W.C Fields

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